Pain slams benchmarking ideals

Fund managers and research houses have come under fire for relying too heavily on benchmarks when constructing portfolios. Speaking at the Portfolio Construction Forum in Sydney, the editor of The Pain Report, Jonathan Pain, criticised what he deemed unrealistic fund manager approaches to portfolio management, and said it was time for fund managers to start to question the research houses that he claimed “attempt to put you in their silly benchmark boxes.”

Highlighting a number of flaws in the current investment model, Pain used the inclusion of News Corp in many investment portfolios to illustrate the industry’s reliance on benchmarks. “There was a time when fund managers were saying that investing in News Corp was cheap, but there wasn’t a single fund manager in Australia who believed that. Yet it comprised 18 per cent of the market,” he said. “Most fund managers didn’t and wouldn’t put their own money in News Corp, but yet invested their clients’ money. This doesn’t make cents nor sense,” he said.

Pain called on the industry to adopt a more tangible approach to portfolio management, and called for a cash benchmark that would allow fund managers to buy the stocks they liked and sell the stocks they didn’t like. He added that such practices would see the money manager and the client become more aligned. “How can we have a world where we buy stocks we hate the most? This is exactly what happened in the case of News Corp,” he said.

Pain said it was time for a reality check when it came to portfolio construction and that it was time to reject what he called “the relentless pursuit of mediocrity”.

“There is no other enterprise where the interests of money managers and clients are so misaligned. Money managers have a fiduciary obligation to challenge research houses and to question their benchmark ideals. Benchmarking reflects none of the reality being witnessed in the investment world,” he said.